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New tax rules for dividends and capital gains realised by non-business individuals

The Budget Law (205/2017), which was approved on December 27 2017, has harmonised the taxation of dividends and capital gains earned by non-business individuals on 'substantial'(1) and 'non-substantial'(2) participation held in Italian and foreign companies, among other things.

Companies and partnerships will be unaffected by these changes, as the distinction between substantial and non-substantial participation is irrelevant.

Under the previous tax regime,(3) capital gains realised by resident and non-resident individuals and dividends received by resident individuals derived from substantial equity interests(4) were partially subject to personal income tax with progressive rates (ie, a maximum tax burden of around 25% considering additional regional and municipal taxes).(5)

Further, under domestic law, foreign taxes levied on foreign dividends or capital gains realised by resident individuals were creditable against Italian income tax within the limits of the amount of Italian tax due.

Under the new rules, non-business individuals will be taxed on dividends and capital gains with a substitutive or withholding tax at a flat rate of 26% on substantial and non-substantial participation and no foreign tax credit will be available.

The new regime will be applied to:

capital gains realised as of January 1 2019; and

dividends received as of January 1 2018.

Nonetheless, the previous tax regime will continue to apply to individuals for dividends accrued up to December 31 2017 and declared or distributed between January 1 2018 and December 31 2022, which will be taxed at the maximum amount of:

17.2% if related to profits accrued up to December 31 2007;

21.37% if related to profits accrued from January 1 2008 to December 31 2016; and

25% if related to profits accrued from January 1 2017 to December 31 2017.(6)

The oldest retained earnings will be distributed first.

Dividends accrued up to December 31 2016 and declared before January 1 2018, and paid thereafter, should also be taxed at 26%. However, this conclusion is neither logical nor systematic and a clarification from the Tax Authority is expected in this regard.

The new tax regime for dividends and capital gains is summarised in the following tables.

Dividends

Received by

Substantial participation

Non-substantial participation

Dividends accrued up to December 12 2017 and declared or distributed between January 1 2018 and December 31 2022

(4) Shares, quotas and other financial instruments are considered to be equity assets under Italian tax law.

(5) Approximately 41.86% of capital gains and dividends realised on a substantial participation was exempt from tax (and 60% in the case of capital gain or dividends related to profits accrued up to 2007 and 50.28% related to profits from 2008 to 2016). The difference of 58.14% (and 40% in the case of capital gain or dividends related to profits accrued up to 2007 and 49.72% related to profits from 2008 to 2016) was taxable at progressive rates.

(6) Unless the applicable withholding tax rate is reduced in accordance with an applicable tax treaty.

(7) Taxation is only 1.2% of the dividend paid out (ie, 5% by 24%)

(8) If the participation exemption regime is applicable. Under this regime, capital gains realised are 95% exempt from corporate income tax. The effective tax on distributed earnings is a combination of the corporate income tax rate (24%) and 5% of the dividend received. Therefore, the effective tax rate is 1.2% (ie, 5% by 24%).

(9) In principle, tax treaties signed by Italy provide for taxation in the state of residence of the selling shareholder (if the foreign taxpayer does not have a permanent establishment in Italy). Nonetheless, specific provisions, such as participations exceeding a given percentage and participations in real estate companies, could be included in the relevant tax treaty (eg, see the tax treaties with France, Canada, Israel and the United States).

(10) The effective tax comes from the applicable corporate income tax rate (24%) and the tax portion of the capital gain realised (58.14%). Therefore, the effective tax rate is 14%. In this respect, some Italian tax courts have recognised the possibility to apply the participation exemption regime (ie, taxation of 5% rather than 58.14%). Thus, no formal position from the Italian tax administration is presently available.

(11) Capital gains will be tax free in Italy if the company is resident in a white list country.

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